Finding the Perfect Partner – Part Three
This is part three of a four part series about the mergers and acquisitions process. The process is described from the perspective of a company on the sell-side, but the information is also interesting for a company finding itself on the buy-side of the transaction.
The typically five to eight month process of a company sale, or a divestiture of a part of its business, can be roughly divided to four components:
- Analysis and valuation
- Identification of potential partners
- Contacting potential partners
- Deal execution
Today we will take a look at contacting potential partners.
More is not always better
As we previously mentioned, a short list of ten meaningful and thoughtfully researched potential partner candidates is worth more than a long list of 100 companies. Time is better spent on narrowing down the candidate list to include only those companies that make sense and to those where we have direct access to the right persons.
It is not what you know but whom you know
In most medium-sized companies, there is typically only one person who actively concerns him/herself with mergers & acquisitions strategy, in most cases the CEO. While there are many other people who are critical to the success of any company, who are well informed about the market and have a great desire to be involved in deciding about its future, only the CEO (or the owner or the Board of Directors, depending on the situation) is in a position to evaluate whether or not our merger or acquisition idea makes sense for their company. Depending on the company’s internal dynamics at the time, our idea may hit the bull’s eye or it may miss the mark completely. So before we pitch a merger or acquisition idea to a company, we get to know the top level management and establish a connection with them.
Painting the picture
The partner candidates are first contacted and offered key stats regarding product range, markets, competitive position and key financials without disclosing the target company name. If the partner candidate shows serious and sincere interest and an acceptable price range for a potential transaction is agreed upon, we will execute a confidentiality agreement and disclose the target’s name. During these conversations we learn about the potential partner’s strategy and objectives, and are hence able to tailor the full Information Memorandum on the target to include necessary information in relevant detail. This information may also consist of different transaction structures or different ways of splitting the target (by market, by product area, etc.) to maximize the sum of its parts. Again, the better we understand both the potential buyer and the seller, the more value we are able to create for both sides.It is very important to present a coherent, logical and straightforward story on the target company. A “moving target”, in which the financials or other key factors about a company or a transaction are being adjusted several times during the process, is a red flag to any potential buyer and usually results in a loss of momentum which itself is enough to stall the cooperative process.
Making the market work for you
The more desirable you are to one CEO, the more desirable you appear to all. Ideally, we want to keep several potential buyers interested and engaged until very late in the process, letting the market forces work for us. This “bidding process” not only drives up the price, it also helps keep up the momentum towards a successful close. Remember, that while having many suitors is flattering and will drive up the price, having one is better than none, hence it is important maintain good faith with all your potential buyers while you work through the decision-making process. We usually succeed by turning your company into a hot commodity, rather than an unremarkable one.
Keeping the momentum
Pacing is critical for all sides. Neither the seller nor the buyer want to waste time on an unlikely match. If the deal is a good fit for both sides, it should be brought to close as quickly and efficiently as possible. If it is not workable, both parties are better off turning their attention to other prospects. Imposing and sticking to tight deadlines regarding initial price indications, confidentiality agreements and eventual binding offers is commonp business practice and recommendable. A deal losing momentum is a dying deal and will make potential buyers nervous and likely to turn their attention elsewhere. We urge the sellers for their own advantage to set and stick to a swift pace, even though we realize that this can be burdensome for the owners who are likely taking time away from their other on-going responsibilities to oversee the details of the sale.
Quality vs. Quantity of Potential Partners
While these recommendations are simple common sense, it is amazing how much of this advice goes ignored in the field. Deals die every day because the right person at the right company was not contacted, because either side was indecisive or a “moving target”, or because the momentum slowed and a window of opportunity closed.
In the next issue I will continue this discussion covering what it takes to complete a deal and how good execution helps turn a great idea into a great transaction.